Blog sponsored by Bankrupt-Law.com


Bankruptcy laws appraised by Law School panel
By Bob Brustman
Harvard News Office


Balancing protections for creditors and debtors is the goal of American
bankruptcy law. Late last year, when the Bankruptcy Abuse Prevention and
Consumer Protection Act (BAPCPA) went into effect, it upset that delicate
balance, according to members of a panel discussion on bankruptcy policy and
the middle class held at Harvard Law School on Monday (March 20).
For the past century, American bankruptcy law served as a social safety net,
rescuing debtors from their creditors. "As early as 1898, American
bankruptcy law promised the honest but unfortunate debtor relief from debt
and a fresh start," said Ingrid Hillinger, professor of law at Boston
College Law School. She described the two types of bankruptcy that
individuals can file: "The Chapter 7 debtor says, 'I give up, here take my
nonexempt assets, sell them, distribute the proceeds to my creditors, give
me my postpetition income and give me a discharge.' Chapter 7 is asset-based
bankruptcy relief. Creditors rely on debtor's nonexempt assets for payment."
Chapter 13 relief is different - debtors keep their assets and, for a three-
to five-year period, commit a portion of their postpetition income to the
payment of the prepetition debt. So, Chapter 13 creditors rely on a debtor's
postpetition income for satisfaction of their claims.
After the bankruptcy reform act of 1978, which made it easier for
individuals to file for bankruptcy, Hillinger says there was an "avalanche
of bankruptcy filings, and each year broke the record from the year before."
And in the overwhelming number of Chapter 7 cases, she said, unsecured
creditors got nothing because the debtor had no nonexempt assets to
relinquish. Chapter 7 had become purely a debtor protection process.
"There was a perception - and we don't know the source," said Hillinger,
"that many folks were abusing the bankruptcy system: They were filing
Chapter 7s and getting a discharge even though they could repay some or all
of their debt." Perhaps in response to this perceived imbalance, MasterCard,
Visa, and a coalition of creditors pushed for the passage of the BAPCPA,
which was signed into law last year. According to some panelists, it's the
middle-class debtor who is the loser.
This act limits access to Chapter 7 relief. In fact, the premier goal of the
creditor community in supporting this legislation, according to John Rao,
staff attorney at the National Consumer Law Center Inc., is to have overall
bankruptcy filings go down.
Under the act, several new steps are required in the bankruptcy process. A
means test for those who earn more than their state's median income is
required. Credit counseling is now required. "The main effort here," said
Rao, "is that if there are enough obstacles to getting bankruptcy relief ...
then consumers simply won't file bankruptcy."
He noted that there were a great many news reports on how much harder it is
to file bankruptcy under the new rules, and he detailed misinformation
purveyed by credit counselors and debt collectors.
"So, where can consumers who are on a debt treadmill turn at this point?"
asked Rao. Congress has said that they need to turn to credit counselors,
who can offer a debt management plan. But "they only deal with one type of
debt - unsecured credit card debt. They're not dealing with foreclosures and
other problems," said Rao. "But the real problem is that they don't work,
because creditors are not offering the concessions that are needed. For
someone in deep financial trouble, they need that debt to be waived or some
portion of that ... the best they [credit counselors] can offer is an
interest rate reduction and maybe the removal of some late fees."
Panelist Alan Resnick, Benjamin Weintraub Distinguished Professor of
Bankruptcy Law at Hofstra University School of Law, said changes in the
bankruptcy laws affect businesses as well as individuals. But the losers do
not seem to change. Resnick noted that when big businesses go through
bankruptcy proceedings, some of the costs that may get cut are medical and
pension plans, thus affecting members of the middle class.
Judge William Hillman of the United States Bankruptcy Court for the District
of Massachusetts rounded out the panel somewhat acerbically: "All debtors in
this country have seen 'Gone with the Wind' because they all know the last
line, which says, 'Tomorrow is another day.' Debtors never do anything until
it's obvious that there is no tomorrow. And that's when they file
bankruptcy."
The bankruptcy panel was followed by another panel that talked about how
housing market conditions are also affecting the increasing financial
vulnerability of the middle class. The panels comprised the Journal on
Legislation's (JOL) annual symposium. The JOL is published semiannually by
Law School students and specializes in the analysis of legislation and the
legislative process.
bob_brustman@harvard.edu